Memories of the financial crisis, five years later

The excited voices on CNBC radio riveted financial adviser John Bacci's attention as he drove to Chestertown five years ago for a routine client visit.

The stock market was in freefall that Sept. 29 after Congress rejected a $700 billion rescue of the financial industry and the Dow Jones industrial average plunged 778 points — the largest one-day point loss ever.

As he walked into the client's house, he avoided shaking her hand.

"My hands were clammy," said Bacci, president of the Linthicum firm Foundation Financial Advisors. "I didn't want her to feel my palms."

The stock market crash was among the many reverberations following the bankruptcy two weeks earlier of Lehman Brothers, one of the oldest and largest investment banks. The bankruptcy was a turning point in the 2008 crisis, which was precipitated by the collapse of the housing bubble. In its wake, the federal government bailed out banks and automakers, investors lost confidence in the markets, and many questioned the viability of the financial system.

That day, Bacci said, was one of the few times in his career he was truly terrified.

"The computers couldn't keep up with the numbers," he said. "You didn't know where it might end."

Until Lehman's bankruptcy, the federal government had intervened when very large financial institutions were in dire trouble. It facilitated the sale of investment bank Bear Stearns earlier that year to JPMorgan Chase. And it took over mortgage giants Fannie Mae and Freddie Mac after they sustained billions of dollars in loan losses from defaults and falling home prices.

But the government let Lehman go. The markets spooked. Credit froze, with big banks wary of lending to one another. It was uncertain whether Congress would do anything — or knew what to do.

After failing once to pass a rescue plan and causing a market panic, lawmakers approved a bailout in early October.

"We still have a very fragile financial system," said Sheila Bair, former chair of the Federal Deposit Insurance Corp., who was in Baltimore last week to speak at University of Baltimore's Merrick School of Business.

Since the crisis, mortgage lending standards have been developed and banks are less highly leveraged and carry more capital, she said. But more needs to be done, such as reforming the securitization of mortgages, she added. The problem is Wall Street banks continue to lobby against reforms.

"Regulators need to show leadership and get this done," said Bair, who left the FDIC in 2011 and wrote a book about the crisis called "Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself."

Now Bair said she's concerned that inflated bond and stock markets could become volatile unless the Federal Reserve successfully tapers its quantitative easing policy, which is meant to keep interest rates low and stimulate borrowing.

Asked where she invests her money, Bair said, "I keep a lot of money in cash."

Here are others' thoughts about the crisis five years later:

Daniel McHugh, president of Lombard Securities Inc.

The day after Lehman's bankruptcy filing, the Reserve Primary Fund — the oldest money market fund and an investor in Lehman debt — announced its shares would fall below $1 each, what the industry calls "breaking the buck" and investors know as losing principal.

Money market funds always had been reliably safe, but some invested in riskier securities to boost returns and now paid the price.

McHugh's chief operating officer called him at home in the early evening about Reserve's news. Baltimore-based Lombard was one of many brokerages that used Reserve Primary to park clients' money.

"I knew when they broke the buck, the fund would be frozen," he said. He also knew there would be a run on other such funds. McHugh called regulators that night to warn of these consequences.

Investors pulled billions out of money market funds in the following days. For the first time, the Treasury Department rushed to guarantee the principal in money funds that bought into a temporary insurance program. Reserve Primary was liquidated with investors losing less than a penny for every dollar invested.

The lesson McHugh learned from 2008: "Real estate is a market that can go down just like any other market can."

"We began fretting in November of 2007," said Fulton, whose Bethesda firm manages $680 million.

A bubble seemed to have developed in financial stocks, Fulton said, so the firm reduced its position in those shares by a third. It also moved clients' money out of money market funds and into U.S. Treasurys.

"We went into 2008 with a lot more cash in our client's portfolios than we would normally have," Fulton said.

Then she watched the cascade of bad news unfold.

"It was very scary," she said. "You could just see it was like the rider of the Apocalypse."

Still in late 2008, Fulton's firm was buying up quality corporate bonds for 20 cents to 40 cents on the dollar.

The government was right not to bail out Lehman and should have let other failing players go under too, she said.

"They all think they are too big to fail," Fulton said. "Someone had to finally pull the plug on them."

Fulton wasn't a fan of the Troubled Asset Relief Program, in which the government provided capital in exchange for dividend-paying securities from the banks, but she acknowledged it was necessary.

She said she wants a return of the Depression-era regulation — repealed in 1999 — that separated securities and traditional commercial banking activities.

Mary Ann Scully, CEO and chairwoman of Howard Bank

Howard Bank was only 4 years old when the market imploded, but Scully wasn't worried. The bank didn't own mortgage-related securities that got institutions in trouble, and Maryland's economy appeared more resilient, she said.

Howard received $6.5 million in early 2009 from TARP. The bank took the money for two reasons, Scully said. One: The economy was weakening and some borrowers were likely to default. And two: Howard saw this as a once-in-a-lifetime opportunity to grow.

Howard had a chance to lure customers from the big banks that would be hit by the crisis, she said, as well as from two nearby competitors that had been acquired recently.

The bank sustained its first and only loss in the fourth quarter of 2009 by writing off bad loans, but its loan portfolio also grew by more than $40 million, she said. Howard repaid the TARP money in 2011.

"Any banker you talk to says it feels like yesterday," Scully said. "The sad thing is some people are acting like we are past it."

Scully said she sees mortgages again that allow consumers to borrow 110 percent of the value of the home. And some commercial banks, she said, once more are lending to small businesses without personal guarantees of repayment.

In nearly 30 years in the business, Hagstrom said he never saw more nerve-racking days than those after Lehman's collapse.

"There was a sense that the financial system itself was under stress and could fail," he said. "Each day that the system didn't crash, you were less afraid."

At the time, Hagstrom was a Legg stock portfolio manager. "You were constantly on the phone, reassuring clients."

Even now, investors have not fully recovered confidence or trust in the system, Hagstrom said. One theory for that, he said, is that investors never saw anyone go to jail for their role in the crisis.

"We have made great strides in trying to prevent something like this from happening again," he said. "Yes, there is more than can be done probably, but we are in better shape today than five years ago."

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